3 C H A P T E R Individual Markets: Demand & Supply

MARKETS DEFINED MARKETS POTENTIAL BUYERS POTENTIAL SELLERS MARKETS

DEMAND DEFINED DEMAND SCHEDULE …a specified time period QD Various Amounts $5 4 3 2 1 10 20 35 55 80 A Series of Possible Prices …a specified time period …other things being equal

LAW OF DEMAND An inverse relationship exists between price and quantity demanded As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls

LAW OF DEMAND Diminishing Marginal Utility

LAW OF DEMAND Diminishing Marginal Utility Income Effect

LAW OF DEMAND Diminishing Marginal Utility Income Effect Substitution Effect

LAW OF DEMAND Diminishing Marginal Utility Income Effect Substitution Effect Demand Curve Individual and Market Demand

GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o 55 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o 10 20 30 40 50 60 70 80 Q 35 Quantity of Corn

GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING DEMAND Connect the Points P QD $5 4 3 2 1 10 20 35 55 80 P D Price of Corn P $5 4 3 2 1 CORN Connect the Points P QD $5 4 3 2 1 10 20 35 55 80 D o 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING DEMAND What if Demand Increases? P QD $5 4 3 2 1 10 20 35 55 Price of Corn What if Demand Increases? P $5 4 3 2 1 CORN P QD $5 4 3 2 1 10 20 35 55 80 D o 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING DEMAND Increase in Quantity Demanded P QD $5 4 3 2 1 10 20 35 Price of Corn P Increase in Quantity Demanded $5 4 3 2 1 CORN P QD $5 4 3 2 1 10 20 35 55 80 30 40 60 80 + Increase in Demand D’ D o 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING DEMAND What if Demand Decreases? P QD $5 4 3 2 1 10 20 35 55 Price of Corn What if Demand Decreases? P $5 4 3 2 1 CORN P QD $5 4 3 2 1 10 20 35 55 80 D o 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING DEMAND Decrease in Quantity Demanded P QD $5 4 3 2 1 10 20 35 Price of Corn P Decrease in Quantity Demanded $5 4 3 2 1 CORN P QD $5 4 3 2 1 10 20 35 55 80 -- 10 20 40 60 Decrease in Demand D D’ o 10 20 30 40 50 60 70 80 Q Quantity of Corn

DETERMINANTS OF DEMAND Tastes Number of Buyers Income Normal (Superior) & Inferior Goods Prices of Related Goods Substitutes & Complements Unrelated Goods Expectations

SUPPLY DEFINED SUPPLY SCHEDULE Various Amounts P QS $1 2 3 4 5 5 20 35 CORN P QS Various Amounts $1 2 3 4 5 5 20 35 50 60

SUPPLY DEFINED …a specified time period …other things being equal SUPPLY SCHEDULE CORN P QS Various Amounts $1 2 3 4 5 5 20 35 50 60 A Series of Possible Prices …a specified time period …other things being equal

LAW OF SUPPLY As Price Rises… …Quantity Supplied Rises As Price Falls… A direct relationship exists between price and quantity supplied As Price Rises… …Quantity Supplied Rises As Price Falls… …Quantity Supplied Falls

GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q 5 Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o 5 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o 35 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING SUPPLY Connect the Points P QS $5 4 3 2 1 60 50 35 20 5 P S o Price of Corn P S $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 Connect the Points o 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING SUPPLY What if Supply Increases? P QS $5 4 3 2 1 60 50 35 20 Price of Corn What if Supply Increases? P S $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING SUPPLY Increase in Supply P QS $5 4 3 2 1 60 50 35 20 5 80 70 Price of Corn P Increase in Supply S’ S $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 80 70 60 45 30 Increase in Quantity Supplied o 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING SUPPLY What if Supply Decreases? P QS $5 4 3 2 1 60 50 35 20 Price of Corn What if Supply Decreases? P S $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o 10 20 30 40 50 60 70 80 Q Quantity of Corn

GRAPHING SUPPLY P QS $5 4 3 2 1 60 50 35 20 5 45 30 20 -- Decrease Price of Corn S’ P S $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 45 30 20 -- Decrease in Quantity Supplied o 10 20 30 40 50 60 70 80 Q Quantity of Corn

DETERMINANTS OF SUPPLY Resource Prices Technology Taxes & Subsidies Prices of Other Goods Price Expectations Number of Sellers

DETERMINANTS OF SUPPLY Resource Prices Technology Taxes & Subsidies Prices of Other Goods Price Expectations Number of Sellers Combining with Demand

x x MARKET DEMAND & SUPPLY EQUILIBRIUM P QD P QS $5 4 3 2 1 10 20 35 BUSHELS OF CORN P QS BUSHELS OF CORN MARKET DEMAND MARKET SUPPLY 200 B U Y E R S 200 S E L R $5 4 3 2 1 10 20 35 55 80 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 60 50 35 20 5 x x EQUILIBRIUM Graphically…

MARKET DEMAND & SUPPLY P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000 Price of Corn P CORN MARKET CORN MARKET S $5 4 3 2 1 P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 Market Clearing Equilibrium $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D 7 o 2 4 6 8 10 12 14 16 Q Quantity of Corn

MARKET DEMAND & SUPPLY Surplus P QD P QS $5 4 3 2 1 2,000 4,000 7,000 Price of Corn P CORN MARKET CORN MARKET Surplus S $5 4 3 2 1 P QD P QS At a $4 price more is being supplied than demanded $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D 7 o 2 4 6 8 10 12 14 16 Q Quantity of Corn

MARKET DEMAND & SUPPLY Shortage P QD P QS $5 4 3 2 1 2,000 4,000 7,000 Price of Corn P CORN MARKET CORN MARKET S $5 4 3 2 1 P QD P QS At a $2 price more is being demanded than supplied $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 Shortage D 7 11 o 2 4 6 8 10 12 14 16 Q Quantity of Corn

MARKET DEMAND & SUPPLY Surplus Shortage P QD P QS $5 4 3 2 1 2,000 Price of Corn P CORN MARKET CORN MARKET Surplus S $5 4 3 2 1 P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 Shortage D 7 11 o 2 4 6 8 10 12 14 16 Q Quantity of Corn

MARKET EQUILIBRIUM Equilibrium Price & Quantity Rationing Function of Prices Changes in Demand Changes in Quantity Demanded Changes in Supply Changes in Quantity Supplied

Complex Cases Multiple Shifts… Supply Increases; Demand Decreases Prices Decrease Quantity Indeterminate Supply Decreases; Demand Increases Price Increases

Complex Cases Multiple Shifts… Supply Increases; Demand Increases Prices Indeterminate Quantity Increases Supply Decreases; Demand Decreases Price Indeterminate Quantity Decreases

Government Set Prices Price Ceilings Price Floors Shortages Rationing Problem Black Markets Rent Controls Price Floors Surpluses

Government Set Prices Price Ceilings Price Floors Shortages Rationing Problem Black Markets Rent Controls Price Floors Surpluses

Key Terms market demand demand schedule law of demand diminishing marginal utility income effect substitution effect demand curve determinants of demand normal goods inferior goods substitute good complementary good change in demand change in quantity demanded supply supply schedule law of supply supply curve determinants of supply change in supply change in quantity supplied surplus shortage equilibrium price equilibrium quantity rationing function of prices price ceiling and floor Copyright McGraw-Hill/Irwin, 2005 BACK END

Next: The Market System Chapter 4